Herbalife Ltd. China Probe Considers Ackman Report

The Herbalife story appears to have become such a broken record that shares of the company don’t move much anymore when new developments are revealed. This time the new development relates to activist investor Bill Ackman’s disclosure that people who had worked on his PR campaign against the company were interviewed by investigators.

Researchers’ Herbalife notes examined

Christopher Matthews and David Benoit of The Wall Street Journal reported on Wednesday that federal prosecutors who are investigating possible price manipulation of Herbalife shares are looking over notes taken by Ackman’s researchers. Ackman has claimed for more than two years that the multi-level marketing company is a pyramid scheme.

A year ago, he specifically accused the company’s China operations of being a pyramid scheme. That accusation came as part of a presentation Ackman gave. According to The Wall Street Journal, federal prosecutors are examining the presentation as they consider where there was any manipulation of Herbalife’s stock price and if anyone related to Ackman’s investigation of the company made any false or misleading statements. The newspaper cites documents and unnamed sources.

What researchers’ notes say about Herbalife

The report states that the researchers’ notes contain “hundreds of pages” which include not only notes but also interview transcriptions. Researchers spoke with Chinese Herbalife distributors and found that the company’s compensation model in China was sometimes confusing and contradictory. Their notes reportedly seemed to confirm some of what Ackman said in March 2014 when he alleged that Herbalife’s China business is a pyramid scheme.

The activist investor claimed that the research showed that Herbalife was violating Chinese laws through the way it was paying distributors. Specifically, he said the company was paying commissions from sales of distributors’ downstream recruits, which he said is illegal in China.

Herbalife has denied all of the accusations raised by Ackman and maintains that it operates within the law in China. The company further stated that Chinese regulators have not taken actions against it.

Pershing Square responds to Herbalife report

After The WSJ’s report, Ackman’s firm Pershing Square Capital Management issued a statement. A representative stated that they’re pleased to see officials looking over last year’s presentation and that they remain “confident” that Herbalife is operating in violation of Chinese laws. Since giving the presentation in question, Pershing said “multiple” former Herbalife distributors in China and an employee of the company in China “have provided additional evidence that confirms that Herbalife is violating Chinese law.”

“Herbalife claims that its Chinese ‘hourly’ compensation system is different from its ‘royalty’ system elsewhere, but its public filings and other documentary evidence show that its business model in China mirrors almost precisely its global “royalty’ commission structure,” the statement reads. “Internal Herbalife documents we have received from a former Herbalife employee show that Herbalife has internally accounted for its Chinese ‘hourly’ compensation system using the same ‘royalty’ terms it applies to the rest of the world.”

The spokesperson further called Herbalife’s hourly compensation system in China “a sham” and said the company never offered any evidence to contradict their accusations.

As of this writing, shares of Herbalife were up 0.75% to $42.79 per share.